Crash Dev - Latest Comments in 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

bob pasker — Fri, 12 Nov 2010 20:20:42 -0000

until an exit, money should be flowing from investors to the company, not the other way around, and financing deals where cash flows from the company to debtholders (rather than accruing) is bad for stockholders.

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

ChristianSays — Fri, 12 Nov 2010 17:35:08 -0000

My understanding is that this is simply debt. Like a bank loan.

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Mark Hand — Tue, 24 Aug 2010 16:06:42 -0000

Chris - can you share a link to the Clayton Christensen paper, please? The only one I could find was from 2001.

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

jeff — Wed, 07 Oct 2009 15:08:19 -0000

Robert,

Interesting comment about equitable subordination. Couldn't you structure your Royalty based loan to convert to equity, following the conculsion of the royalty payments? Or take equity upside as a warrant?

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Thomas — Wed, 30 Sep 2009 14:37:04 -0000

Chris, thanks for a very interesting blog. I'm a co-author on the paper you mentioned, I'd love to chat some time. Cheers!

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Robert — Thu, 20 Aug 2009 08:55:17 -0000

Chris,

Has your fund now implemented Class R Stock in any investments? It seems what's been missing from the discussion is that by making the revenue share part of the stock rights, the company would likely be prohibited from paying out revenue share payments until the company has become profitable. This is because paying out revenue share payments to stockholders before a company has any earnings (profits) would likely be deemed an impairment to capital, which is prohibited under the corporate law. The capital impairment rules are designed to prevent stockholders getting around equitable subordination rules - creditors get paid before stockholders. Pure royalty-based financing doesn't suffer from this problem because a royalty agreement that is not linked to capital stock is in effect a debt instrument and not a stock right, so would not be subject to capital impairment limitations. Even if you decouple couple the stock investment from the revenue share, you're still at risk for equitable subordination issues if the investment and royalty agreement are entered into at the same time (and you take a board seat in the portfolio company). This is why bankers never seek a board seat with their borrowers. How have you overcome this problem?

Robert

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Wayne — Thu, 25 Jun 2009 18:25:52 -0000

I wonder if the IRS view these royalty financing agreements (pledge of royalty streams) as financial instruments or Intangible Assets. (Fixed Term License).

Re: 'VC is Broken', Royalty Based Finance and 'Class R' Stock

Nick — Thu, 18 Jun 2009 15:21:12 -0000

Chris - for deals we're doing, we are insisting upon various ways to "sweep" capital in advance of any liquidity event or actual return of capital. Any structure that gives current pay is a value add IMO.